Skip the Flexible Spending Account in 2011.

I didn’t have a FSA last year (Flexible Spending Account), but this year I was hell bent on saving as much money as possible on my taxes… so I thought I better take advantage of the option to put away some money tax free for inevitable health care costs.  I analyzed my previous year’s medical expenses and figured that $1000 would be a conservative estimate.  So I enrolled in the company  plan… I’ve participated this year… and I won’t be doing it again.

Here’s why:

1. Flexible Spending Accounts = Inflexible

You gotta use it or lose it.  You can’t roll money over from year to year — although your plan may provide a grace period at the beginning of the following year.  What’s the advantage of the tax savings if you don’t spend all the money?

Some plans offer a debit card which is an added convenience, but I’m not so lucky. That means that I have to collect and submit all of my receipts manually and in advance  and get reimbursed later. As convenient as it would be to have a debit card, there is still the inconvenience of having to submit receipts regardless.

I also have to make sure that I’m submitting the right receipt that includes the eligible services rendered.

Claims can’t be submitted online. They have to be faxed or mailed which is kind of old school.  In addition, the claim form is much more complicated than a standard expense report.

These accounts can only be used for certain health care expenses. Trying to decipher the guidelines and figure out if an expense is eligible is like reading a pharmacology textbook, something I would rather leave to med students.

2. Time is Money

It took me a good six months to figure out how to use my Flexible Spending Account. There’s been a significant time investment – setting up the account, researching how to file a claim, collecting and filing receipts,  preparing the claim forms, submitting the claim, going to the bank to cash the checks, resubmitting rejected expenses, etc.

I might happily endure the hassle and time investment mentioned above if there were a big payoff waiting on the finish line… so let’s analyze the benefits.

What am I going to save this year?  Say my taxes would be 35% or so on the money (including income and payroll taxes) and I’ve allocated $1000 for my account (close to the national average apparently).  That’s a paper savings of $350.  I’m embarrassed at how much time I’ve had to commit to the process however. I’ve probably spent 20 hours cogitating about the FSA and doing the work to prepare it…  no joke.  My free time is worth more than $17.50 per hour to me.

An FSA might make sense if you’ve got large recurring health or dependent care expenses.  However, the caps are going down in 2013 so you won’t be able to put aside more than $2500 for long.

3. Risk abounds

When you’ve considered that in my case a FSA doesn’t really make sense based on the time commitment and the potential rewards, it’s also unfortunate that there’s a potential risk if you don’t use all of your money… remember it’s use it or lose it. What if you don’t have any medical expenses for the year?  Well, then tough luck, you’re out however much you put it in.  It turns out that the average balance remaining in accounts is around $100, per the Employee Benefits Research Institute.  I’ve seen this play out — I remember my boss saying that he had to run to the drug store to load up on OTC medicine to use all the funds in his account.  He later complained that he still had money left over.

How has your experience been with FSA’s?

Thanks to Cash Money for including this post in the 280th Carnival of Personal Finance